Builder Optimism + Affordability Higher

The Mortgage Corner

Good news is that rising wages and moderating home prices offset a rise in mortgage interest rates to give housing affordability a slight boost in the first quarter of 2017, said the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) last week.

And In a further sign that the housing market continues to strengthen, builder confidence in the market for newly-built single-family homes rose two points in May to a level of 70 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the second highest HMI reading since the downturn.

NAHB.org

"The HMI confidence measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market," said NAHB Chief Economist Robert Dietz. "Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward."

But housing construction is not yet catching up to demand, as I said in a recent column. The first quarter ended with a thud for housing starts which fell a very steep 6.8 percent to a 1.215 million annualized rate which is the weakest since November, said the NAHB. Posting similar declines were both single-family homes, at an 821,000 pace, and multi-family, at 394,000. Housing construction does show nearly double-digit year-on-year growth, though quarter-to-quarter movement is barely perceptible. 

It looks like employment is now ahead of housing, hence demand exceeds the supply of new housing, a good sign.

"Ongoing job growth continues to fuel demand for housing, while wage growth is helping to offset the effects of rising mortgage rates and keep home prices affordable," said NAHB Chief Economist Robert Dietz. "NAHB anticipates that housing will continue on a gradual, upward path throughout the year."

In all, 60.3 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $68,000. This is up from the 59.9 percent of homes sold that were affordable to median-income earners in the fourth quarter.

The national median home price fell to $245,000 in the first quarter from $250,000 in the final quarter of 2016. Meanwhile, average mortgage rates rose nearly half a point from 3.84 percent in the fourth quarter to 4.33 percent in the first quarter.

But mortgage rates have fallen since then, which will increase affordability for first-time home buyers, in particular. The 30-year fixed conforming rate today is 3.625 percent with a 1 point origination fee in California, which means fixed mortgage rates have returned to rates last available in the 1950s.

So, once again, interest rates are not rising with expectations of higher inflation. Inflation is not even showing up in housing prices. So let us hope this continues, even if the Fed does raise short term rates a third time in June, as it has hinted it would do.

Harlan Green © 2017

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Housing Starts Surge With Builder Optimism

The Mortgage Corner

A mid-winter surge in multifamily production resulted in overall nationwide housing starts rising 11.3 percent to a seasonally adjusted annual rate of 1.23 million units, according to newly released data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. This is Yuge, and will help to ease the shortage of rental units that has been driving up rental rates, squeezing low and moderate-income renters out of some housing markets.

Single-family construction dropped 4 percent to a seasonally adjusted annual rate of 795,000 units, but that was still 3.9 percent higher in a year. Multifamily production jumped 57 percent to 431,000 units in December. However, the monthly data for apartment production has exhibited strong volatility since August, sand the National Association of Home Builders. Still this may stop the average rent increase of 7 percent annually in high growth regions.

Graph: Calculated Risk

“This report represents firm growth for housing in 2016, as single-family starts rose 9 percent and multifamily production was down slightly,” said NAHB Chief Economist Robert Dietz. “We expect that 2017 will be another year of gradual, steady improvement in the housing market. Multifamily starts have been volatile in recent months, but should level off as supply meets demand. Meanwhile, single-family production continues to gain momentum but is limited by supply-side headwinds.”

Regionally in December, combined single- and multifamily housing production rose 31.2 percent in the Midwest, 23.5 percent in the West and 18.5 percent in the Northeast. The South posted a loss of 1.4 percent. That is an incredible increase in mid-winter, and reflects the rush to build before the predicted rise in interest rates this year.
The National Association of Home Builders (NAHB) also reported that though the housing market index (HMI) of builder optimism in future housing construction dropped slightly to 67 in January, down from 69 in December, any number above 50 indicates that more builders view sales conditions as good than poor. And this is easily the highest confidence rating since the end of the Great Recession.

Graph: NAHB

The slight drop in confidence may also be because of uncertainty over future building regulations, which are set state by state, rather than nationally, and interest rates, of course, which many predict will rise, as I said.

So despite the January drop, some builders say there are still reasons to be bullish. "Builders begin the year optimistic that a new Congress and administration will help create a better climate for small businesses, particularly as it relates to streamlining and reforming the regulatory process," said NAHB Chairman Granger MacDonald.

Such optimism will evaporate, however, if interest rate rise sharply. But with the conforming 30-year fixed rate falling back to 3.75 percent in California of late, that may not happen. Could it be that optimism over future growth could also mean higher inflation, which means higher interest rates, as well?

This writer is also optimistic that with Janet Yellen and her Fed Governors still cautious about forecasting higher growth and inflation—where will all those workers come from that will be needed for any new infrastructure projects when there is already a shortage of construction workers—remains to be seen.

Harlan Green © 2017

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Housing Construction--Slow But Steady Increase

The Mortgage Corner

Single-family housing construction rose in September. Though overall starts plunged what looks like a shocking 9.0 percent in September, to a 1.047 million annualized rate, said Econoday. The drop is tied entirely to the volatile multi-family component where starts fell a massive 38 percent in the month to a 264,000 rate. But the more important single-family component is up sharply in its own right, 8.1 percent higher to a 783,000 rate.

Graph: Calculated Risk

However, no problem, as multi-family construction starts were up sharply in August. But the graph really shows how far we need to catch up to prior years. There just aren’t enough affordable homes to satisfy demands for more affording dwellings, and the Fed is now hinting at a December rate hike.

What will happen to those millennials that want to buy their first home? However builder confidence is still high, according to the Wells Fargo Home Builders Index, and purchase mortgage applications are up 13 percent in a year, which may be the reason builders are still optimistic about future construction and inventories.

Builder confidence in the market for newly constructed single-family homes was down just two points to a level of 63 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

Graph: NAHB.org

  “The October reading represents a mild pullback from a jump in September, and indicates that the housing market continues to make slow and steady gains,” said NAHB Chief Economist Robert Dietz. “Moreover, mortgage rates remain low and the HMI index measuring future sales expectations has been over 70 for the past two months. These factors will sustain continued growth in the single-family market in the months ahead.”

So there may be a lull in sales, as the NAR’s Pending Home Sales Index of future sales is also lower. According to NAR chief economist LawrenceYun, evidence is piling up that without more new home construction the current housing recovery could stall. Housing inventory has declined year-over-year for 15 straight months; properties in August typically sold 11 days quicker than in August 2015¹ and after increasing 5.1 percent last month, existing-home prices have risen year-over-year for 54 consecutive months.

"There will be an expected seasonal decline in new listings in coming months, which could accelerate price appreciation and make finding an affordable home even more of a struggle for would-be buyers," added Yun.

Mortgage rates have bumped up slightly, with 30-year fixed conforming rates now 3.125 percent for a 1.0 pt. origination fee, and 3.375 percent for no points in California, which is helping to boost the mortgage volume. The question then will be, who can afford to buy without more homes in the construction pipeline?

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Much More Housing Needed

The Mortgage Corner

There’s an exception to the current low inflation prognostications echoed in my column on the San Francisco Fed John Williams. It’s in housing, which is struggling to meet the surging demand for both new homes and apartments that our newest millennial generation and immigrants need. The result is housing prices are rising faster than inflation, some 5 to 6 percent.

But if Janet Yellen and her Fed Governors give in to the cry by inflation hawks for higher interest rates just because Q3 and Q4 growth may be slightly higher than the horrid current GDP growth (how about 1.2 percent?), the housing rally (if you can call it that) would be nipped in the bud. It’s only because of the record low mortgage rates that housing is becoming more affordable for those that can afford to buy—which is the diminished American middle class. We will know more when both new and existing-home sales come out this week.

Millennials are the new baby boomers (as well as their offspring) in being the largest population group in history. And they are coming of age, all 80 million of them, of which the oldest now are 36 years of age and forming households.

 Graph: NAHB.org

This increased demand for housing is reflected in new home construction and higher builder optimism, reflected in the Wells Fargo Housing Market Index that measures home builders sentiment, and has been positive since January 2014.

Graph: Econoday

 July housing starts rose a strong 2.1 percent to a 1.211 million annualized rate which comes on top of June's 5.6 percent surge. Starts for single-family homes, the most important category in terms of economic growth, rose a very respectable 0.5 percent in July but were dwarfed by a 5.0 percent surge for multi-family homes. These results point to ongoing strength for construction, as well.

Other signs point to faster growth, such as industrial production, which is finally expanding after contracting for more than one year? July production jumped 0.7 percent to give a big one half point lift to the capacity utilization rate which is at 75.9 percent, according to the Federal Reserve. And the Chicago Fed’s National Economic Activity Index that attempts to measure overall US growth rose to a 12-month high this week.

Graph: Econoday

Manufacturing output rose 0.5 percent in the month which follows a downward revised but still very respectable 0.3 percent gain in June. Vehicle production was exceptionally strong in June and was also very solid in July though other manufacturing industries were also strong contributors to the latest month's gain.
Hi-tech was also strong in the month and a look at market groups shows 0.6 percent monthly gains for both consumer goods and business goods, the latter a plus given the persistent weakness in business investment.

The pundits are saying that Fed Governor Yellen will hint at a boost in the Fed’s short term rates from 0.5 percent, but that would be a mistake. There is no really affordable housing being built at present, which means rents and rental housing will have to carry the burden of new household formation.

And the result is that rents are now rising at record rates throughout the country. In fact, RealtyTrac, (www.realtytrac.com) “the nation’s leading source for comprehensive housing data,” released its 2016 Rental Affordability Analysis in January, which shows that buying is still more affordable than renting in 58 percent of U.S. housing markets despite home price appreciation outpacing rent growth in 55 percent of markets. The report also shows that the rise in rents is outpacing weekly wage growth in 57 percent of markets, per Realtytrac.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

A Record Year For Mortgages?

The Mortgage Corner

First quarter mortgage numbers are in, and we could be having a very good year for mortgage originations, says Equifax, among others. According to Equifax’s report, the total dollar amount of first-mortgage originations during the first quarter of the year was $450.5 billion, which represented a year-over-year increase of 12.3 percent, the highest amount for a first quarter total since 2013.

And privately-owned housing starts in June were at a seasonally adjusted annual rate of 1,189,000, according to the US Census Bureau, which will create future demand for mortgages when completed. This is 4.8 percent above the revised May estimate of 1,135,000, but is 2.0 percent below the June 2015 rate of 1,213,000.

Graph: Econoday

Single-family housing starts in June were at a rate of 778,000; it is 4.4 percent above the revised May figure of 745,000. The June rate for units in buildings with five units or more was 392,000. But starts are still not keeping up with demand, with soaring rental rates and falling vacancy rates in most metropolitan areas, a sign of a very tight—and expensive—rental market, which has to motivate many renters to become homebuyers.

Graph: Freddie Mac

No wonder, as the 30-year conforming fixed rate has dropped to as low as 3.0 percent for a 1.25 point origination fee in California on primary residences, as long as borrowers’ so-called ‘tri-merge’ mid-credit scores are above 740. This is the lowest rate since WWII, and such low rates are projected to continue through the fall, at least, according to Freddie Mac

Why? It’s fairly easy to understand, as Britain’s Brexit vote showed that the Eurozone may be a European Union in name only. The resultant uncertainty is causing a flight to safe haven investments, and US stocks and bonds provide the ultimate safe haven with US growth picking up while other countries show little or no growth.

Also, builder confidence in the market for newly built, single-family homes in July held, falling just one point to 59 from a June reading of 60 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released on Monday.

“The economic fundamentals are in place for continued slow, steady growth in the housing market,” said NAHB Chief Economist Robert Dietz. “Job creation is solid, mortgage rates are at historic lows and household formations are rising. These factors should help to bring more buyers into the market as the year progresses.”

Graph: NAHB

Who will those future homebuyers be? First-time homebuyers now make up some 32 percent, according to the NAR. And Lawrence Yun, NAR chief economist, says although millennials have made up the largest share of buyers for three consecutive years, sales to first-time buyers and the homeownership rate for young adults under the age of 35 remain depressed at levels not seen in decades. This is despite historically low mortgage rates, escalating rental costs and low unemployment levels among those with a college education. 

“Even with potentially higher incomes, prospective millennial homebuyers residing in some of the most expensive cities in the country face the onerous task of paying steep rents while trying to save for an adequate down payment,” he said. “However, for those currently living in or looking to move to a more affordable part of the country, there are metro areas right now with solid job growth and that offer a smoother path to homeownership.”

So affordability will continue to be the main obstacle to homeownership, as well as historically heavy student debt loads for those same millennials, unless future Congresses will make public colleges in particular tuition-free, a benefit which all developed and many emerging countries already offer their young citizens.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

New-Home Construction, Builders’ Optimism Still Rising

The Mortgage Corner

Home builders’ optimism is still high, though builder confidence in the market for newly built single-family homes fell one point in December to a level of 57 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), following a four-point uptick last month.

Graph: Calculated Risk

“After a sluggish start to 2014, the HMI has stabilized in the mid-to-high 50s index level trend for the past six months, which is consistent with our assessment that we are in a slow march back to normal,” said NAHB Chief Economist David Crowe. “As we head into 2015, the housing market should continue to recover at a steady, gradual pace.”

What is helping new-home demand is the lack of existing-home inventory. Total housing inventory at the end of October fell 2.6 percent to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace – the lowest since March (also 5.1 months).

Meanwhile, new-home construction that would replenish housing inventories is advancing in fits and starts, largely due to uncertain weather conditions and still tough mortgage qualification standards that lenders have only recently begun to ease. Privately-owned housing starts in November were at a seasonally adjusted annual rate of 1,028,000. This is 1.6 percent below the revised October estimate of 1,045,000 and is 7.0 percent below the November 2013 rate of 1,105,000.

Single-family housing starts in November were at a rate of 677,000; this is 5.4 percent below the revised October figure of 716,000, but double the number of multiple units being started. The November rate for units in buildings with five units or more was 340,000.

Graph: Calculated Risk

Another reason for builders’ optimism and healthy new-home construction is the pickup in U.S. employment. Private non-farm payrolls increased 321,000 in November and the jobless rate held at 5.8 percent. The competition for jobs is also dropping, with just 1.9 unemployed workers looking for work per job opening, when it was as much as 4 workers per job opening just after the Great Recession.

Also, prospective borrowers may find it easier to get a loan in 2015 as some lenders, encouraged by federal regulators, ease standards. In addition, mortgage rates are still low, enabling qualified borrowers to get relatively cheap loans. For example, 30-year fixed rate conforming mortgage rates with as little as 5 percent down have dropped to 3.50 percent in California.

Another reason for the better job numbers is industrial production increased 1.3 percent in November after edging up in October. In November, manufacturing output increased 1.1 percent, with widespread gains among industries. The rise in factory output was well above its average monthly pace of 0.3 percent over the previous five months and was its largest gain since February. It is up 13.2 percent from its low point in 2009, according to Calculated Risk.

NAR also recently released its economic and housing forecast for 2015 and 2016. NAR chief economist Lawrence Yun is forecasting existing-home sales this year to fall slightly below 2013 (5.1 million) to 4.9 million, and then increase to 5.3 million next year and 5.4 million in 2016. Yun expects the national median existing-home price to rise 4 percent both next year and in 2016.

Harlan Green © 2014

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Is Builder Optimism, New Home Construction Faltering?

The Mortgage Corner

Will new-home construction falter, now that interest rates are rising and consumers remain unsettled over Washington’s political gridlock that prevents any legislation being passed that would aid economic growth?

Builder confidence in the market for newly built, single-family homes was unchanged in November from a downwardly revised level of 54, reported the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This means that for the sixth consecutive month, more builders have viewed market conditions as good than poor, since any index value above 50 percent, means a majority of builders report growing activity. But that hasn’t spurred more new-home construction, which is stuck at early spring levels.

Graph: Calculated Risk

“Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road,” said NAHB Chairman Rick Judson. “Meanwhile, builders continue to face challenges related to rising construction costs and low appraisals.”

“Policy and economic uncertainty is undermining consumer confidence,” said NAHB Chief Economist David Crowe. “The fact that builder confidence remains above 50 is an encouraging sign, considering the unresolved debt and federal budget issues cause builders and consumers to remain on the sideline.”

New-home construction has basically stalled since April and the beginning of interest rates increases due to the Fed’s hints that QE3 could end. This will hurt economic growth and employment, since new-home construction makes up a large part of economic growth these days, with other growth components are being constrained by lower government and consumer spending.

Graph: Calculated Risk

There has been a significant increase in new home sales this year.  Sales of new single-family houses in August 2013 were at a seasonally adjusted annual rate of 421,000, according to estimates by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.9 percent above the revised July rate of 390,000 and is 12.6 percent above the August 2012 estimate of 374,000
Read more at

Though year-over-year increases have slowed - August only saw a year-over-year increase of 12.6 percent, but Calculated Risk’s Bill McBride still expects new home sales to be up 15 percent to 20 percent for the year.  That follows an annual increase of 21 percent in 2012.

The seasonally adjusted estimate of new houses for sale at the end of August was 175,000. This represents a supply of 5.0 months at the current sales rate. It means that new home construction has not taken up the slack in supply, and might slow new-home sales.

The initial third Quarter GDP growth was 2.8 percent, up from 2.5 percent in Q2. And residential real estate activity was a large part of that increase. So we will need more new-home construction to keep growth at that level.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

Housing Affordability Up, Inventories Still Shrinking

The Mortgage Corner

The National Association of Home Builders (NAHB) reported exceptionally low interest rates helped ensure a slight gain in nationwide housing affordability amid relatively stable house prices in the final quarter of 2012, according to the just released National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI).

In all, 74.9 percent of homes sold between the beginning of October and end of December were affordable to families earning the U.S. median income of $65,000. This was up nearly a percentage point from the 74.1 percent of homes sold that were affordable to median-income earners in last year’s third quarter.

Interest rates have risen about one-quarter percent from their recent lows, to average 3.50 percent for 30-year fixed rate conforming loan amounts in California with zero points origination fees. Even so-called High-Balance 30-year fixed conforming amounts are averaging 3.75 percent with zero points origination fees, still phenomenally low, thanks to the Federal Reserve’s QE buying programs.

“The most recent housing affordability data should be encouraging to many prospective home buyers, because it shows that homeownership remains within reach of median-income consumers even as most local markets appear to be on a recovery path,” said NAHB Chairman Rick Judson.  He noted that the most recent reading of the NAHB/First American Improving Markets Index found that 259 out of 361 metros currently qualify as improving, including representatives from all 50 states and the District of Columbia.

This is while Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased to a seasonally adjusted annual rate of 4.92 million in January from a downwardly revised 4.90 million in December, and are 9.1 percent above the 4.51 million-unit pace in January 2012. The graph shows sales’ levels are almost back to 2000 levels, the beginning of the fastest rise in housing prices.

Graph: Calculated Risk

NAR chief economist Lawrence Yun said tight inventory is a major factor in the market. "Buyer traffic is continuing to pick up, while seller traffic is holding steady," he said. "In fact, buyer traffic is 40 percent above a year ago, so there is plenty of demand but insufficient inventory to improve sales more strongly. We've transitioned into a seller's market in much of the country."

Total housing inventory at the end of January fell 4.9 percent to 1.74 million existing homes available for sale, which represents a 4.2-month supply at the current sales pace, down from 4.5 months in December, and is the lowest housing supply since April 2005 when it was also 4.2 months, but also close to 2000 levels.

Graph: Calculated Risk

Listed inventory is 25.3 percent below a year ago when there was a 6.2-month supply. Raw unsold inventory is at the lowest level since December 1999 when there were 1.71 million homes on the market.

"We expect a seasonal rise of inventory this spring, but it may be insufficient to avoid more frequent incidences of multiple bidding and faster-than-normal price growth," said Yun.

The question yet to be answered is whether the declining prices of foreclosure sales discussed in my last blog will increase the housing supply in months to come.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

Existing-Homes Inventory at Record Lows

The Mortgage Corner

The housing market is recovering with the highest sales and price rises since 2007. Only problem is that inventory is also at the lowest level since 2007, with just 4.4 month’s supply of housing on the market. We haven’t seen this low a level since early 2000.

The result is that housing prices are predicted to rise some 5.6 percent this year, and housing construction to top 1 million units for the first time in 5 to 6 years.

Graph: Calculated Risk

Total national existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 1.0 percent to a seasonally adjusted annual rate of 4.94 million in December from a downwardly revised 4.99 million in November, but are 12.8 percent above the 4.38 million-unit level in December 2011, says the National Association of Realtors.

Graph: Calculated Risk

The preliminary annual total for existing-home sales in 2012 was 4.65 million, up 9.2 percent from 4.26 million in 2011. It was the highest volume since 2007 when it reached 5.03 million and the strongest increase since 2004.

The result was total housing inventory at the end of December fell 8.5 percent to 1.82 million existing homes available for sale, which represents a 4.4-month supply at the current sales pace, down from 4.8 months in November, and is the lowest housing supply since May of 2005.

This means new-home construction will have to pick up to satisfy the increasing demand for housing—which includes both single family homes and rental units for those who aren’t purchasing. And the outlook is good, with privately-owned housing starts in December at a seasonally adjusted annual rate of 954,000. This is 12.1 percent above the revised November estimate of 851,000 and is 36.9 percent above the December 2011 rate of 697,000, according to the US Census Bureau.

This Calculated Risk graph that dates back to 1968 tells us how far construction has to grow to even return to historical levels of 1.5 million annual units. The shadowed areas are recessions.

On a year-over-year basis, private residential construction spending is now up 19 percent. Non-residential spending is up 8 percent year-over-year mostly due to energy spending says Calculated Risk. Public spending is down 3 percent year-over-year, and that is the real problem. Governments should be spending much more on public infrastructure, when and if the economy returns to more normal growth.

The real problem at present is the political gridlock. “Builders’ sentiment remains very close to the index’s tipping point of 50, where an equal number of builders view conditions as good and poor, and fundamentals indicate continued momentum in housing this year,” said National Association of Home Builders Chief Economist David Crowe. “However, persistently tight mortgage credit conditions, difficulties in obtaining accurate appraisals and the ongoing stalemate in Washington over critical economic concerns continue to impede the housing recovery.”

Need we say more about what is holding back not only housing growth, but overall economic growth in this country?

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

High Pending Home Sales—A 2013 Housing Shortage?

The Mortgage Corner

The huge jump is pending home sales could presage a sharp drop in inventory of homes for sale in 2013. Why? There are fewer foreclosures because of the declining shadow inventory of homes in default that have been bloating the for-sale inventories resulting from the housing bubble. And this is already causing home prices to rise while housing construction is still lagging, 50 percent below its recent high.

The Pending Home Sales Index just released by the National Association of Realtors, a forward-looking indicator based on contract signings but not closings, increased 5.2 percent to 104.8 in October from an upwardly revised 99.6 in September and is 13.2 percent above October 2011.

Lawrence Yun , NAR chief economist, said buyers are responding to favorable market conditions. "We've had very good housing affordability conditions for quite some time, but we're seeing more impact now from steady job creation, and rising consumer confidence about home buying now that home prices have clearly turned positive."

Outside of a few spikes during the tax credit period, pending home sales are at the highest level since March 2007 when the index also reached 104.8. On a year-over-year basis, pending home sales have risen for 18 consecutive months.

Graph: Calculated Risk

"The Northeast saw some impact from Hurricane Sandy, but limited inventory in the West is keeping a lid on the market. All regions are up from a year ago, with double-digit gains in every region but the West," Yun said. Housing inventories are down 23 percent in one year.

And we see that foreclosure inventories have been declining, as have foreclosure rates. We now see short sales replacing foreclosure sales, down to just 20 percent of all sales from its high of 35 percent just after the Great Recession.

Calculated Risk reports Lenders Processing Service released their First Look report for October today. LPS reported that the percent of loans delinquent decreased in October compared to September, and declined about 7 percent year-over-year. Also the percent of loans in the foreclosure process declined sharply in October and are the lowest level since August 2009.

Graph: Calculated Risk

LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 7.03 percent from 7.40 percent in September. Note: the normal rate for delinquencies is around 4.5 percent.

Lastly, home prices are rising because of the declining for-sale inventories. Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio, since housing prices cannot rise faster than rents (i.e., household incomes) over the longer term. Therefore the ratio between rents and prices tells us if housing prices are rising abnormally, as happened during the housing bubble. As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation.

Graph: Calculated Risk

This actually means that we should see a surge in housing construction, and therefore construction jobs in 2013. Stay tuned for the National Association of Home Builders sentiment survey that tracks builder’s confidence in new home construction to confirm that will happen.  Its index has already tripled since its post-recession lows.

Harlan Green © 2012

Consumer Spending Continues to Improve

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The most recent retail sales show consumers continue to spend, as consumer borrowing is increasing. Add to that credit card delinquencies are at an 18-year low, according to credit reporting company Transunion Corp., and we have a picture of an improving economy.

"The national credit card delinquency rate continues to remain at the lowest levels we've observed in 18 years," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. "It's a positive situation because average borrower balances have increased over the past year as new card originations have grown."

Retail sales soared in July. Total sales rose 0.8 percent for the strongest rise since February with ex-auto sales also up 0.8 percent for, again, the best showing since February. All components show gains including motor vehicles, general merchandise, health & personal care, furniture, and restaurants. Clothing also shows a significant gain, one that points to strength for the back-to-school season. Ex-auto ex-gas the gain is 0.9 percent for the best showing since January, said Econoday.

Graph: Econoday

This was predicted by the surge in consumer borrowing. Total credit outstanding rose $6.5 billion in June, following a $16.7 billion jump the month before, reported the Federal Reserve. The latest gain was led by non-revolving credit, gaining $10.2 billion in June after a $9.2 billion rise in May. Non-revolving credit is mostly for motor vehicle purchases and student loans. 

Graph: Econoday

What is behind greater consumer spending is they continue to improve their financial position. Personal income in June gained 0.5 percent, following an advance of 0.3 percent the prior month.  The wages & salaries component also showed strength, rising 0.5 percent after a 0.1 percent rise in May.

Graph: Econoday

And with 163,000 net payrolls jobs added in July, their condition should continue to improve. Both the goods-producing and service-providing sectors added jobs. Goods-producing jobs indicate that manufacturing is doing better than monthly surveys suggest.  Total goods-producing jobs rose 24,000 in July after a 13,000 gain the prior month.  Manufacturing rose 25,000 after a 10,000 boost in June.

So even the drag from Europe’s austerity-induced recession hasn’t kept American consumers down. Even housing is showing signs of life, with the NAHB’s builder confidence survey at its highest level since February 2007, which should boost consumer confidence even higher.

Harlan Green © 2012

Builder Confidence Highest Since 2007

The Mortgage Corner

Builder confidence in the market for newly built, single-family homes gained one point in June from a slightly revised level in the previous month to rest at 29 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This is the highest level the index has attained since May of 2007.

“This month’s modest uptick in builder confidence comes on the heels of a four-point gain in May and is reflective of the continued, gradual improvement we are seeing in many individual housing markets as more buyers decide to take advantage of today’s low prices and interest rates,” said Barry Rutenberg, chairman of the National Association of Home Builders (NAHB).

Graph: Calculated Risk

Those low interest rates are spurring South Coast existing-home sales, according to Gary Woods’ May MLS report. May marked the third month in a row that sales of homes topped 100 going up to over 130 for the Home Estate/PUD market. The median sales price also shot up to about $825,000 for the month, rising from $756,300 in April. The numbers of escrows also rose in May to about 170 from 142 in April with the median list price on those approximately 170 opened escrows going up from $789,000 in April to about $840,000 in May.

Annual South Coast sales are up from 340 to about 475, a 40 percent rise in a year while the median sales price is down a little from $810,000 last year to about $795,000 for a 2 percent drop. Even more impressive is the surge in escrows, up from 405 to about 605 for a 50 percent upswing with the median list price on those escrows going down 10 percent from $879,000 to about $800,000.

Why? It’s no secret that interest rates have dropped below 4 percent for several months now, and that makes housing all the more affordable.

Graph: Calculated Risk

But there is still a serious backlog of delinquent mortgages, according to the Federal Housing finance Authority’s Q1 report. It’s no surprise that Florida and Nevada lead the pack in delinquent loans, but the fact that New Jersey, Illinois, and New York homeowners are in difficulty is surprising. The largest backlog of foreclosures is in the states with judicial foreclosures, which can take up to one year to complete. Trust Deed states like California avoid the courts for the most part in foreclosure proceedings.

Harlan Green © 2012

Builder Confidence Rises Five Points in May

The Mortgage Corner

It may not seem like much in such a depressed real estate market, but builder confidence in the market for newly built, single-family homes gained five points in May from a downwardly revised reading in the previous month to reach a level of 29 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This is the index’s strongest reading since May of 2007. And that will give a boost to several other industries, including construction and finance.

Graph: Calculated Risk

“Builders in many markets are reporting that buyer traffic and sales have picked back up after a pause this April,” said Barry Rutenberg, chairman of the National Association of Home Builders (NAHB). “It seems we have resumed the gradual upward trend in confidence that started at the beginning of this year, as stabilizing prices and excellent affordability encourage more people to pursue a new-home purchase.”

More good news is that mortgage delinquencies continue to decline, reports the Mortgage Bankers Association. “The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 7.40 percent of all loans outstanding as of the end of the first quarter of 2012, a decrease of 18 basis points from the fourth quarter of 2011, and a decrease of 92 basis points from one year ago”, according to the MBA’s National Delinquency Survey. “The non-seasonally adjusted delinquency rate decreased 121 basis points to 6.94 percent this quarter from 8.15 percent last quarter.”

And Realtors in some markets are reporting multiple offers, reports Calculated Risk.

Jon Lansner at the Orange Country, California Register: O.C. homes draw multiple-offer ‘avalanche’ (an excerpt from Steve Thomas' report) “Below $500,000 range is NUTS. Homes priced at or near their market value are generating an avalanche of multiple offers. A home in this range is placed on the market and, within moments, cars filled with buyers are touring the home. ...Upon writing an offer, buyers quickly find that they are one of many, sometimes over ten, offers on the home. Suddenly ... In the end, the seller factors the highest price with the largest down payment. I know, you are thinking, “What about the appraisal?” In many instances, shrewd sellers and Realtors are leveraging the competition to drop the appraisal contingency and require the buyer to make up the difference between the appraisal price and the purchase price, IF there is an appraisal problem. ... Supply has dropped to levels not seen since June 2005. ... The expected market time for all of Orange County is 1.5 months, or six weeks.”

So, “While home building still has quite a way to go toward a fully healthy market, the fact that the HMI has returned to trend is an excellent sign that firming home values, improving employment and low mortgage rates are drawing consumers back,” said NAHB Chief Economist David Crowe. “The pace of this emerging recovery could be stronger were it not for the significant impediments that the market continues to face with regard to builder and consumer access to credit, inaccurate appraisals, and more recently, rising materials prices.”

Harlan Green © 2012

Real Estate Will Survive This

The Mortgage Corner

We are finally seeing some turnaround in housing—in those markets and regions that haven’t suffered as much from the housing bubble. That means of course where housing wasn’t overbuilt and unemployment not so severe. The boom and bust cycle occurred mostly in Florida, Nevada, California, and Arizona, where unemployment is highest. Michigan has the biggest drop in joblessness—from 14 percent to 11 percent, thanks to a recovering auto industry.

The latest S&P Case-Shiller Home Price survey tells us where are the winners and losers. Gambling capital Las Vegas still leads the losers, with Phoenix, Arizona, Miami and Tampa, Florida close behind. Dallas, Denver, and Boston suffered the least.

Graphs: Calculated Risk Blog

On a Not Seasonally Adjusted (NSA) basis, as of July, the Case-Shiller composite 10 index was 3.8 percent above the post-bubble low. The Composite 20 index was 3.7 percent above the post-bubble low (NSA). But the prices rises may be temporary due to a not very strong selling season and might fall to new lows (NSA) later this year or early in 2012, says Econoday.

Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, tell us the overall state of housing. They declined 3.0 percent to a seasonally adjusted annual rate of 4.91 million in September from an upwardly revised 5.06 million in August, but are 11.3 percent above the 4.41 million unit pace in September 2010.

And we can see that sales have been hovering around 5 million after the huge volatility in 2009-10, with the end of the housing tax credit and fears of a double-dip recession. Housing sales seem to have stabilized, in other words, and probably won’t show much upside until the huge backlog of foreclosures is worked through. But very strict credit conditions are also dampening sales, according to the National Association of Realtors.

NAR chief economist Lawrence Yun also said the market has been stable although at low levels, and there is plenty of room for improvement. “Existing-home sales have bounced around this year, staying relatively close to the current level in most months,” he said. “The irony is affordability conditions have improved to historic highs and more creditworthy borrowers are trying to purchase homes, but the share of contract failures is double the level of September 2010. Even so, the volume of successful buyers is higher than a year ago and is remaining fairly stable – this speaks to an unfulfilled demand.”

One key to future sales will be the for-sale inventory, which is also impacted by the large number of foreclosures coming on the market. Sales are still hovering around an 8 months’ supply, whereas 4 to 5 months is the historical norm, according to Calculated Risk.

Another plus was that builder confidence in the market for newly built, single-family homes rose four points to 18 on the just released National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for October. This is the largest one-month gain the index has seen since the home buyer tax credit program helped spur the market in April of 2010, and is in line with the rise in housing construction.

"Builder confidence regained some ground in October due to modest improvements in buyer interest in select markets where economic recovery is starting to take hold and where foreclosure activity has remained comparatively subdued," said NAHB Chairman Bob Nielsen.

One reason for the increased builder optimism was that construction spending actually increased for the first time year-over-over year since the beginning of the recession. This was largely from the public sector although major private components also gained. August construction spending rebounded 1.4 percent, following a 1.4 percent drop in July. The rise in August came in much higher than the consensus forecast for a 0.2 percent decrease, again according to Econoday.

What about the future? Housing demand has historically depended mostly on household formation, largely a function of twenty-somethings leaving home to strike out with their own household. It has historically hovered around 1 million per year, but sunk to a 500,000 annual average during the recession. We will see a sharp increase in housing construction and sales when this generation feels confident about jobs and the economy to begin to buy again.

“Living in tight spaces is not sustainable”, says the NAR’s Lawrence Yun. “More people cannot be comfortably shoved into existing households.  Aside from the desire to be independent and to move away from temporary living situations, there is the issue of “familiarity breeding contempt,” as the saying goes.  It is just a matter of time before household formation returns to its historic normal growth of 1 to 1.2 million each year.  There could even be more-than-normal household formation for a few years from both normal population growth and from people leaving temporary arrangements.  A stronger economy and job prospects will help in restoring normal household formation.”

Home builders are expected to add only 770,000 new units this year, which is well below the one million new demand from household formation, but still up from the 500,000 range of the past three years. One optimist on household formation is Warren Buffet, who believes it will take new household formation to bring back the housing market and economic growth in general.

We are already seeing that happen with the latest construction spending numbers, which showed a big jump in apartment construction, rising rents and a drop in vacancy rates. Predictions are that household formation could again reach the 1 million mark as early as next year, if jobs creation continues to improve.

Harlan Green © 2011